What does liquidity risk refer to?

Liquidity risk specifically refers to the risk that an organization or individual will not be able to meet short-term financial obligations due to the inability to convert assets into cash quickly without significant loss in value. This situation can arise during financial distress or when market conditions deteriorate, leading to a lack of buyers for certain assets.

Having sufficient liquidity is critical for organizations to manage their operational needs, such as paying suppliers, meeting payroll, and covering other immediate expenses. If an entity faces liquidity issues, it may have to resort to unfavorable conditions to raise funds, which can further exacerbate financial problems.

The other options address different types of risks that are not focused on the capacity to fulfill short-term obligations. While losing investment value, overcoming market fluctuations, and asset depreciation are important considerations in finance and investment, they do not directly pertain to the concept of liquidity risk.